An eclectic paradigm, also known as the ownership, location, internalization (OLI) model or OLI framework, is a strategic three-tiered evaluation framework designed for companies contemplating foreign direct investment (FDI). This paradigm posits that firms will eschew market transactions in favor of internal operations when they can perform the same actions more cost-effectively in-house. Originating from the internalization theory, the eclectic paradigm was first proposed in 1979 by academician John H. Dunning.
Key Takeaways
- An eclectic paradigm, also called the ownership, location, internalization (OLI) model or OLI framework, is strategic for evaluating FDI opportunities.
- It provides a holistic approach to understanding business relationships and operational interactions.
- The goal is to assess if a business strategy offers greater value compared to national or international alternatives for goods or service production.
Understanding Eclectic Paradigms
The eclectic paradigm offers a holistic perspective, analyzing the comprehensive interactions and relationships of a business’s operational components. It serves as a strategic framework for expanding operations through FDI, aiming to discover the most cost-effective and valuable options for producing goods or services while preserving quality.
Three Key Factors of the Eclectic Paradigm
For FDI to be worth pursuing, three critical advantages must be evident:
Ownership Advantages
Ownership advantages encompass proprietary information and various rights, which may include branding, copyrights, trademarks, or patents, alongside the management of in-house skills. Typically intangible, these advantages provide the firm with a competitive edge, such as a reputation for reliability and innovation.
Location Advantage
The second consideration, location advantage, involves assessing whether certain functions stand to gain from being performed in specific regions. Fixed in nature, location advantages comprise the availability and cost-effectiveness of resources in different locations. These resources, natural or manufactured, require close collaboration with local entities to unlock full potential.
Internalization Advantages
Internalization advantages depict scenarios where it is more beneficial for a firm to produce goods or services in-house rather than contracting with external entities. While contracting out may at times lower costs, overseeing production internally often secures quality and efficiency. Optimal international ventures may involve outsourcing to third-party vendors, provided they meet quality standards and offer substantial cost savings along with local market insights or superior craftsmanship.
Real World Example
Consider how Shanghai Vision Technology Company leveraged the eclectic paradigm in its decision-making process for exporting 3D printers and technological innovations. Weighing the cons of tariffs and logistics, their international strategy significantly expanded their market reach and business growth.
Related Terms: Internalization Theory, FDI, Comparative Advantage, Outsourcing, Internationalization Strategy.
